Thursday, December 23, 2010

Recent Case Illustrates Dangers in Prime/Sub Relationships

Last week, a subcontractor prevailed in a suit brought against a prime contractor in Virginia's Fairfax Circuit Court. In this case, the prime subcontractor refused to reimburse its subcontractor for interim indirect rate variance invoices until the Defense Contract Audit Agency (DCAA) completed a final audit of the rates. (That could take a long long time given how far behind DCAA is in auditing final indirect rates - especially at small contractors) The prime contractor's position is of course, contrary to FAR 52.216-7, which allows for interim rate adjustments prior to contract closeout. Besides, the parties went through a lengthy and time consuming reconciliation process to verify the invoices and correct any mistakes. In addition, during the reconciliation process, a supervisor at the prime contractor stated in an e-mail to the subcontractor that "[i]t is unreasonable to expect you [the subcontractor] to wait for some undetermined amount of time for the DCAA to work your rate adjustments" and offered to pay 70% of the invoices.

However, before the prime contractor made the partial payments on the variance invoices, it reversed course and refused to pay the invoices. This decision occurred at a time when the prime and sub began competing for the same government contracts to provide linguistic services to support the war effort. In addition to failing to pay the invoices due, the prime also refused to provide past performance (when it had done so previously) and trashed the sub to the government client by falsely stating (without solicitation) in an e-mail "[t]he solvency of [the subcontractor] is an issue (not sure if they even still exist)…" The Court found that this was an attack on a competitor.

The Court ruled in favor of the subcontractor. The prime had to pay up $2.8 million In unreimbursed costs plus about a half million dollars in interest. Although we don't believe this happen very often, it does illustrate some of the dangers in subcontracting.

No comments:

Post a Comment